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Buy-to-let investing in South African Property

In recent years, South African property has been an excellent investment, particularly in the most sought-after coastal regions, where prices have risen fastest.

Buy to Let Property Investment Cape TownThere are various kinds of property investment. Your home is an investment in that it provides you with rent-free accommodation. It may also yield a return in terms of increased value (a capital gain), although that gain may be difficult to realise unless you trade down or move to another region or country where property is cheaper.

Of course, if you buy property other than for your own regular use, e.g. a holiday home, you will be in a position to benefit from a more tangible return on your investment. There are four main categories of investment property:

  • A holiday home, which can provide your family and friends with rent-free accommodation while (hopefully) maintaining or increasing its value; you may be able to let it to generate supplementary income.
  • A home for your children or relatives, which may increase in value and could also be let when not in use to provide an income.
  • A business property, which could be anything from a private home with bed and breakfast or guest accommodation to a shop or office.
  • A property purchased purely for investment, which could be a capital investment or provide a regular income, or both. In recent years, many people have invested in property rather than shares or savings to provide an income on their retirement.

A property investment should be considered over the medium to long term, i.e. a minimum of five and preferably 10 to 15 years. Bear in mind that property isn’t always ‘as safe as houses’ and investments can be risky in the short to medium term. You must also take into account income tax, if a property is let, and property taxes. Capital gains tax is charged at normal income tax rates in South Africa, and you may be liable for tax on any profit made if the property isn’t your main residence. You also need to recoup purchase costs of 10 to 12 per cent when you sell.

When buying to let, you must ensure that the rent will cover the mortgage (if applicable), running costs and void periods (when the property isn’t let). Bear in mind that rental rates and letting seasons vary with the region and town, and an area with high rents and occupancy rates today may not be so fruitful in the future. Gross rental yields (the annual rent as a percentage of a property’s value) are from around 5 to 10 per cent per year in most areas (although gross yields of 15 per cent or more are possible), and net yields (after expenses have been deducted) 2 to 3 per cent lower. Yields vary considerably with the region or city and the type of property.

Before deciding to invest in a property, you should ask yourself the following questions:

  • Can I afford to tie up capital in the medium to long term, i.e. at least five years?
  • How likely is the value of the property to rise during this period and by how much?
  • Can I rely on a regular income from my investment? If so, how easy will it be to generate that income, e.g. to find tenants? Will I be able to pay the mortgage if the property is empty and, if so, for how long?
  • Am I aware of all the risks involved and how comfortable am I with taking those risks?
  • Do I have enough information to make an objective decision?

Tax write-offs for buy-to-let market

Affordable and quality residential rental units for middle income South Africans can become more accessible if investors capitalise on the tax write-offs for buy-to-let investing in Section 13sex of the Income Tax Act.

The tax write-offs obtainable through Section 13sex come into effect when property investors buy a minimum of five residential units for rental. Purchasers are then able to off-set their investment by depreciating the cost of the units at an accelerated rate of 5% a year over 20 years.

Cape Town based Property Investment company – IGrow Wealth Investment’s aim is to alert residential property buyers to the little-known tax incentives introduced by Section 13sex.

Ever since the South African Revenue Service (SARS) introduced its Section 13sex residential building allowance in 2008, Jacques Fouche has been working on putting together a product offering that would allow an investor to take maximum advantage of the tax write-off opportunities therein.

Our value-added offering means the investor does not have to personally deal with all the inevitable legal, financial and property-based legwork, because they handle all that, he says.

SARS created the Section 13sex legislation specifically to incentivise the investor market to encourage developers to build buy-to-let properties aimed at providing much needed housing for people in the middle income market, most of whom cannot afford to buy their own homes.

The tax write-offs obtainable through Section 13sex come into effect when property investors buy a minimum of five residential units for rental. Purchasers are then able to off-set their investment by depreciating the cost of the units at an accelerated rate of 5% a year over 20 years.

Furthermore, the allowance is not prorated, so a property purchased on the last day of the tax year still qualifies for the full five percent depreciation.

IGrow Wealth Investments in-house team of experts  with a dedicated team of lawyers, accountants and property investment consultants that specialize in Property Tax aim to maximise Section 13sex tax advantages for their buyers.

The tax incentive was introduced to help mitigate the impact of the 2008 global economic recession and actively support the buy-to-let sector of the residential property market.

“As the economic crisis deepened, banks throughout South Africa tightened their lending criteria and made it increasingly difficult to buy property.”

Consider a buyer with a gross monthly income of R120 000 who invests in five units at a total cost of R2.9 million. With a 90% mortgage, the initial deposit amounts to R285 000.

Without Section 13sex, the monthly cost for these five units would be R7 800. However, Robertson says the accelerated depreciation allowance brings down the buyer’s tax bill to R6 300 a month, making the effective cost R1 500 a month. That’s a significant saving of over 80%.

It is important that South African property investors help address the significant need for affordable and quality rental properties. In doing so, they believe they are contributing positively to nation-building.

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